All Forum Posts by: Kyle Bishop

@Wayne Brooks I'm sure I'm missing something here but the buyer pays $6,595.20 per year (P+I) and I'd have 58000 into the deal. I'm guessing the calculation needs to be different than a typical COC analysis on a property since the income doesn't continue in perpetuity, but my first instinct is to just go with 6,595.20 / 58,000 (~11%).

@Chris Seveney

1. This would be in Tennessee. I've been poking at some local laws but have come up mostly inconclusive. Should I wish to proceed, I'll be looking into some local lawyers in hopes of getting a clear cut answer into the foreclosure/eviction story for land contracts.
2. It's certainly possible they wouldn't, though the returns look to be around 11% if they stuck to the normal payoff period.
3. That's certainly a possibility. What kind of yield/return would you expecte for this kind of deal to be worth it? I'd imagine you're advocating for at least beating typical REIT returns which, from some cursory googling, seem to be around 7%.

@John Teachout It is my understanding that they don't get any equity until the payoff date. What makes you say it's not enough of a discount?

It is extremely unlikely that they will pay it off as a lump sum (through refi or otherwise), but even if they do I'd be making 7k without doing much of anything. A 12% return if they were to pay it off immediately, more from the interest if they made at least a few payments. Maybe I'm missing something, though...

@John Teachout that's exactly what the buyer wants to do. My calculations above are based off the assumption that they're paying $275/month extra towards the principal.

EDIT:

Sorry I'm an idiot, you mean them just getting a mortgage and paying the whole thing off? I'd make a quick 7k if they did that, so I don't think I'd have any issue with it since I'm buying the note at a discount.

That said, I think the buyer is very unlikely to do that.

To be honest I'm not entirely sure what to call it, but a note seems appropriate.

The note holder has a property set up as a rent-to-own, but the terms require the renter to be responsible for all repairs, taxes, and cap-ex. It's effectively structured like a seller-financed mortgage where the buyer would be evicted in-case of non-payments (instead of foreclosed on). Perhaps this is just a semi-standard rent-to-own agreement, but it's the first time I've come across such a deal. There are various reasons why the renter/buyer agreed to these terms, but suffice to say it's a sound agreement between all parties.

The terms:

• $72k 20 year mortgage @ 6.8%
• Buyer just made payment 44 out of 240 (3 years 8 months into mortgage)
• ~$64,950 remaining principal
• Note-holder would sell to me for $58k
• In the case of an eviction, the house is currently assessed around $140k and I could either sell it for an absurd profit, or just rent it out again (personally I'd hold and do a normal lease).
• The kicker: The buyer would like to increase their principal payments from $550 to $825

Plugging these numbers into here: https://www.bankrate.com/calcu... and doing some slightly fuzzy math:

• ~$9,895.20 per year for 8.3 years before the mortgage is paid off
• Total payments over lifetime of loan: 9895.20 * 8.3 years = $84109.20
• Monthly profit on interest: ($84109.20 - 58000) / (8.3 years * 12) = $262.13 for 8.3 years
• Total Monthly income: $84109.20 / (8.3 * 12) = $844.20 for 8.3 years

So how the heck do I get to COC from here? Am I right to think it would just be $84109 / $58000 / 8.3 years = 17.5%?

I've found calculating COC on notes to be quite challenging because of the amortization schedule... much thanks to anyone who can set me straight!

@Jay Weathersby That's super interesting... I think this is where the "due on sale" clause can potentially bite you (though from the podcast it sounds like it typically isn't a problem). I guess the sky's the limit as far as flexibility with that kind of loan... I wonder about taking a mortgage off someone's hands through seller financing without even having to provide a down payment!

I never understood why people would do lease-to-own when the owner could just rent without the "own", but that makes perfect sense that its easier to deal with someone higher risk through a lease. Really cool to learn about these alternative methods of financing!

Thank you @Lionel Li!!! That was the missing piece for me.

@Wayne Brooks I'd hope they wouldn't do that! I mentioned in a previous comment about adding some kind of clause preventing early payment. Regardless, it seems like this is too complex for me to ask about over the forums. I'll chat with a realtor to see what I'm missing.

@Storm S. If your monthly payments are the same and the loan is fixed term, there wouldn't be any extra cost, but like mentioned, I'm probably missing something about loaning laws here and will talk to someone in-person.

@Keyonte Summers if you're setting it up as a typical mortgage then it's a fixed length... the interest % has nothing to do with your payoff date.

100k loan at 4%, standard 30-year term:
- Monthly P+I payment: ~$465
- $57,495.61 paid in interest after 30 years
- 20k down payment

28k loan at 20%, standard 30-year term:
- Monthly P+I payment: ~$465
- $126,394.82 paid in interest after 30 years
- 2.8k down payment + give them 17.2k cash (maybe this isn't legal, and that's why this strategy doesn't work?)

The seller receives the same for either, and the buyer pays the same for either, but the buyer has a higher interest write-off on the latter.

"Its an unethical": To the buyer or to the government? I'm not advocating for doing anything here, just trying to understand why this isn't more common.

"At that you have bad negotiating skills": That seems pretty uncalled for... though if I'm doing something wrong I certainly want to be called out for it.